Buy and Hold strategy advantages
Recently I wrote about the advantages and disadvantages of the strategy “buy and hold” in stocks. However, I did not mention two of the most important factors about this strategy: A bad and a good one.
Depending on our country, the best advantage a buy and hold strategy may have is taxation and the awful tax policy of some countries like Spain. Unfortunately, those of us who live here have to stand horrendous tax rates and not many alternatives to avoid them, except tax evasion or emigrating. The first option is not recommendable, and the second is only feasible if you have quite a lot of money and not attachments. In that case you can go to Malta or some place in the Caribbean and enjoy your trading profits.
Short term trading (trades that last less than one year) is taxed at an increasing rate in Spain. The tax rate for trading income above 40 thousand € is around 50%. Who can stand it for long? Not many.
Buy and Hold taxes
That problem may be avoided if we use a buy and hold strategy for long term, since trades that last for more than one year will be treated better. They will be taxed at the savings rate, around 25%. Not a small rate, but bearable.
Nonetheless, this year we have the Spanish Government rectifying this despicable rule and announcing that the rate for short-term trades will go back to be taxed at the savings rate.
We must know that we will always be under the threat of a change in taxation.
You know, governments always look for scapegoats when there is a crisis, and speculators are its favorite. Then it should not surprise us that when the crisis hits the markets again the Governments will be looking for ways to change the taxation for short term trading. Not to mention about the Financial Transaction Tax, or a government by Podemos (an almost communist party that is leading the polls in Spain now). In that case, we had better pack our bags and set out for new horizons.
Buy and Hold disadvantage
What about the disadvantage of Buy and Hold?
Well, this strategy is only valid for a long term investment when you are doing an annual contribution, like a private pension plan.
It is not a good trading strategy when you have a considerable amount of money and decide to invest it. It could be when we have a heritage or when we have sold some property and have extra cash, or when we have a surplus of any kind. Buy and hold is not advisable for those cases.
Just imagine it is 1929 that you have saved 100.000 € for ten years, and you decide that it is time to take some risk and invest it, and you buy stocks. You would have to wait 25 years to get your money back (less if we include dividends).
Or you are Japanesse and have extra money from a house you sold, and decide to invest it in the stock market, and it is 1989. In that case you would still be waiting (25 years later) to recover your money. It could also be 1980 in USA and get 20 years of incredible bull market. But who knows?
Buy and Hold pensions
The Buy and Hold strategy may be good for someone who wants to create his own pension plan. If that person knows that he can save 5 or 50 thousand € every year, then it could be a good idea to invest it in the stock market.
The strategy consists in investing part of your savings in some stock index year after year.
Let us assume that we are in 1929, and we invest 5 thousand $ in the Dow. We should wait 25 years to recover that investment. But, if we invest 5 thousand $ the following years, like 1932, 1933, 1934, we would have returns ranging from 100% to 500% in a few years. That is because we would also be buying stocks at the bottom (not only at the top).
So if we make an average, some years later we will find out that that strategy was not that bad. We could also enjoy the nice dividends that were paid when stocks were in 1933 and on. Those are the ideal moments to invest long term.
Speaking of this, I remember a book or Robert Heinlein, The Door into Summer, where the main character knew about the usefulness of “buy and hold” strategy.
He froze his body with the intention to wake up in the future.
He knew that when he would wake up he would have more than enough money thanks to his investment in stocks (he knew about stock market certainly).
Therefore, the Buy and Hold strategy is one of the best ways to prepare our own pension fund for the future. But as a passive system it does not work for short and medium term success in the stock market. If we want to be more successful in the medium term, we should try other techniques like technical and macro analysis.
Thanks for reading and sharing.